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Bidders move in on Northern Rock as deadline looms

13 November 2007
Two months after the first run on a British bank for more than a century, Northern Rock continues to lean heavily on the Bank of England for support as it attempts to find a solution to its liquidity problems, which could vary from a buy-out to a break-up.

This is proving difficult, a solution needs to be found by the time the Bank of England’s Northern Rock well runs dry in March – the obligatory six month limit enforced by European rules on state aid. And not only that; an ideal situation would also see Northern Rock regain financial stability; securing its employees’ jobs, losing the dependency it has upon the Government, and attracting a bidder with a strong balance sheet, management credibility and one that could offer the best outcome for shareholders.

However, the Government wants to see a quick end to the debacle, and, having lent upwards of £20 billion to Northern Rock during the period since it went into crisis and its customers withdrew £3 billion from its branches over three days, it will have a say in its fate and some believe that it favours a break-up.

Banks are predicting that the total loan will rise to £25-£30 billion before the crisis comes to an end, one way or another, and Northern Rock has employed the services of a legal expert in order to investigate ways of avoiding European law and extending its access to Government aid beyond the March 14 deadline.

Ex-chief executive and saviour of Abbey, Luqman Arnold, has made a proposition which promises to uphold most of these criterion and reinstate the Northern Rock brand; offering more than other bidders for shares which will also prove popular with shareholders, but the plan could take longer than the Government will be comfortable with and his bid is unlikely to match that of JC Flowers’ £15 billion fund.

Shareholders also hold a stake in Northern Rock and will therefore have be given a voice when it comes to deciding its future, but the value of its shares has been in question as investors try to determine whether any value remains in its equity; most bidders, with the exception of Arnold, have placed little to no value on the shares.

© Fair Investment Company Ltd